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Prudential Responses to de facto Dollarization

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Author Info

  • Alain Ize
  • Andrew Powell

Abstract

We present a model that encompasses three distinct motives for dollarization (price volatility, credit risk, and moral hazard) and discuss when risk-based prudential policy responses are called for and the form they should take. We argue that the overall policy response must be tailored to the nature of the dollarization the economy is facing. However, prudential policies should be formulated irrespective of the roots of dollarization. Their aim should be to enhance financial stability by ensuring that banks internalize credit risk within acceptable risk tolerance levels, taking dollarization and the current monetary policy environment as given.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/13841280500394485
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Economic Policy Reform.

Volume (Year): 8 (2005)
Issue (Month): 4 ()
Pages: 241-262

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Handle: RePEc:taf:jpolrf:v:8:y:2005:i:4:p:241-262

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Related research

Keywords: Dollarization; prudential regulation; monetary policy;

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References

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  1. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," IDB Publications 6467, Inter-American Development Bank.
  2. Gale, Douglas M & Vives, Xavier, 2001. "Dollarization, Bailouts and the Stability of the Banking System," CEPR Discussion Papers 2901, C.E.P.R. Discussion Papers.
  3. Dooley, Michael P, 2000. "A Model of Crises in Emerging Markets," Economic Journal, Royal Economic Society, vol. 110(460), pages 256-72, January.
  4. Guillermo A. Calvo & Pablo E. Guidotti, 1990. "Credibility and Nominal Debt: Exploring the Role of Maturity in Managing Inflation," IMF Staff Papers, Palgrave Macmillan, vol. 37(3), pages 612-635, September.
  5. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1999. "Hedging and financial fragility in fixed exchange rate regimes," Working Paper Series WP-99-11, Federal Reserve Bank of Chicago.
  6. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
  7. Cowan, kevin & Quy-Toan Do, 2003. "Financial dollarization and central bank credibility," Policy Research Working Paper Series 3082, The World Bank.
  8. Alain Ize & Eric Parrado, 2002. "Dollarization, Monetary Policy, and the Pass-Through," IMF Working Papers 02/188, International Monetary Fund.
  9. Marcus Miller & Joseph Stiglitz, 1999. "Bankruptcy Protection Against Macroeconomics Shocks: The case for a 'super Chapter 11'," CSGR Hot Topics: Research on Current Issues 08, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  10. Martin Schneider & Aaron Tornell, 2000. "Balance SHeet Effects, Bailout Guarantees and Financial Crises," NBER Working Papers 8060, National Bureau of Economic Research, Inc.
  11. McKinnon, Ronald I & Pill, Huw, 1997. "Credible Economic Liberalizations and Overborrowing," American Economic Review, American Economic Association, vol. 87(2), pages 189-93, May.
  12. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June.
  13. Marco Terrones & Luis Catão, 2000. "Determinants of Dollarization - The Banking Side," IMF Working Papers 00/146, International Monetary Fund.
  14. De Nicolo, Gianni & Honohan, Patrick & Ize, Alain, 2003. "Dollarization of the banking system : good or bad?," Policy Research Working Paper Series 3116, The World Bank.
  15. Broda, Christian & Yeyati, Eduardo Levy, 2006. "Endogenous Deposit Dollarization," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 963-988, June.
  16. Ricardo J. Caballero & Arvind Krishnamurthy, 2003. "Excessive Dollar Debt: Financial Development and Underinsurance," Journal of Finance, American Finance Association, vol. 58(2), pages 867-894, 04.
  17. Ize, Alain & Yeyati, Eduardo Levy, 2003. "Financial dollarization," Journal of International Economics, Elsevier, vol. 59(2), pages 323-347, March.
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Citations

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Cited by:
  1. Luis Fernando Escobar Patiño & Pablo Hernán Mendieta Ossio, 2006. "Inflación y depreciación en una economía dolarizada: el caso de Bolivia," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 1-39, enero-mar.
  2. de la Torre, Augusto & Gozzi, Juan Carlos & Schmukler, Sergio L., 2006. "Financial development in Latin America : big emerging issues, limited policy answers," Policy Research Working Paper Series 3963, The World Bank.
  3. Matteo Bobba & Andrew Powell & Giuseppe Della Corte, 2007. "Sobre los determinantes de la elección de moneda internacional: Dominará el Euro en el Mundo?," Research Department Publications 4531, Inter-American Development Bank, Research Department.
  4. Rappoport, Veronica, 2009. "Persistence of dollarization after price stabilization," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 979-989, October.
  5. repec:idb:brikps:78869 is not listed on IDEAS
  6. Eduardo Levy Yeyati & Alain Ize, 2005. "Financial De-Dollarization: Is It for Real?," IMF Working Papers 05/187, International Monetary Fund.
  7. Antonio Garcia Pascual & Jorge Cayazzo & Socorro Heysen & Eva Gutierrez, 2006. "Toward an Effective Supervision of Partially Dollarized Banking Systems," IMF Working Papers 06/32, International Monetary Fund.
  8. Liliana Schumacher & Jiro Honda, 2006. "Adopting Full Dollarization in Postconflict Economies: Would the Gains Compensate for the Losses in Liberia?," IMF Working Papers 06/82, International Monetary Fund.
  9. Enrique L. Kawamura & Daniel Heymann, 2005. "On Liability Dollarization: A Simple Model with Domestic and Foreign Creditors," Working Papers 80, Universidad de San Andres, Departamento de Economia, revised Feb 2005.
  10. Matteo Bobba & Andrew Powell & Giuseppe Della Corte, 2007. "On the Determinants of International Currency Choice: Will the Euro Dominate the World?," Research Department Publications 4530, Inter-American Development Bank, Research Department.

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